Employers Beware: United States Department of Labor and Internal Revenue Service Team up to Combat Misclassification of Workers as Independent Contractors

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On September 19, 2011, the United States Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) announced the agencies’ agreement to jointly combat the misclassification of workers as independent contractors.  Specifically, the DOL and IRS’s joint Memorandum of Understanding (“MOU”) indicates that their efforts are aimed at ending some employers’ practice of misclassifying employees.  In signing the MOU at the DOL ceremony Secretary of Labor Hilda L. Solis declared: “We’re here today to sign a series of agreements that together send a coordinated  message: We’re standing united to end the practice of misclassifying employees.”  Employers must take heed.

Various state and labor officials have signed on to the MOU, including Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, Washington and New York’s Attorney General.  State labor agencies in Hawaii, Illinois and Montana have also entered into memorandums of understanding with the DOL’s Wage and Hour Division.  By signing on to the MOU, the agency and state signatories may more freely share information and coordinate law enforcement.  Employers that utilize “independent contractors” in any manner are well advised to assess their relationships and determine whether the classification can withstand what will surely be heightened scrutiny from various enforcement agencies.

Of course, as independent contractors do not necessarily receive minimum wage or overtime pay, unemployment insurance, workers’ compensation or Social Security benefits, they lose valuable protections if they become disabled or unemployed, and thus become a drain on the system.  In addition, employers do not pay employment taxes on compensation paid to such contractors, which deprives the government of substantial tax revenue.  For all these reasons, the government is well incentivized to root out improperly classified relationships.  The DOL and IRS have made clear their intention to do just that.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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